Dollar turns up after Fed details exit plans

DeborahLevine

LisaTwaronite

NEW YORK (MarketWatch) -- The dollar turned higher versus the euro and yen late Wednesday after the Federal Reserve detailed its plans to remove excess liquidity from the financial system as previously planned.

The U.S. central bank upgraded its assessment of the economy, though futures indicate traders don't expect that to increase the chance that the Fed will raise interest rates any sooner or faster than previously anticipated. Record low rates tend to weigh on a currency by reducing the return on assets denominated in it.

"The Fed highlighted the natural endpoints for its liquidity and credit provisions to help to remind the market that a move towards tighter policy is already ongoing," said Todd Elmer, currency strategist at Citi. "It's not a one step process."

The euro bought $1.4527, reversing a small gain earlier and down slightly from $1.4531 in late New York trading on Tuesday.

The dollar index
DXY, +0.47%
which tracks the greenback against a trade-weighted basket of six major counterparts, traded at 76.934, compared to 76.863 before the statement and still off from 77.022 on Tuesday, when it touched the highest in more than two months.

The central bank reiterated its key phrase that "economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period."

Still, long-term Treasury yields gave up earlier gains to head back towards the highest since August, making the securities more attractive.

"The statement wasn't going to stand in the way of a moderate updraft in yields, which contributed to a stronger dollar," Elmer said.

The Fed explicitly listed all of its emergency loan facilities and spelled out their expiration dates. None of the dates were new, but the Fed is choosing not to extend them further. See more on Fed programs in bond column.

"The fact that it will continue to unwind its extraordinary liquidity provisions saw the dollar bounce back," said Marc Chandler, head of currency strategy at Brown Brothers Harriman. "The end of the special liquidity facilities would seem to be a precondition of raising interest rates, which the market of course is sensitive to."

Earlier in the session, the dollar was briefly supported after the U.S. Labor Department said core prices, excluding food and energy, were unexpectedly flat last month, signaling that inflation remains in check.

The U.S consumer price index rose 0.4% in November from a month earlier, pushing it up 1.8% in the past year. November's data marked the first positive year-over-year gain for the CPI since February. See more on CPI.

"While we remain concerned about the prospects for inflation in the out years, the idea that the Fed should move immediately because inflation is, and inflationary expectations are, becoming unhinged remains an unhinged position itself," said Dan Greenhaus, chief economic strategist at Miller Tabak.

That is "reminding everyone that the twin deficits are here to stay" and making the data thoroughly mixed, said Kathy Lien, director of currency research at Global Forex Trading.

U.K., Australia

The British pound
GBPUSD, -0.0954%
rose to $1.6328, up from $1.6267, after data showed U.K. jobless claims unexpectedly declined in November, for the first time since February 2008.

Positive euro-zone purchasing managers indexes on manufacturing and services also were generally well received by the market.

The Australian dollar fell 0.8% against its U.S. counterpart, to buy 89.87 U.S. cents, after data showed Australia's economy grew in the third quarter at a slower pace and below market expectations. See full story on Australian GDP.

Deputy Governor of the Reserve Bank of Australia Ric Battellino reportedly said Wednesday that Australian monetary policy has returned to a normal range. That suggests widening bank margins are "doing much of the RBA's work for it," wrote Sue Trinh, senior currency strategist at RBC Capital Markets.

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